Banks in Turkey are spearheading bond issuance in the international markets this week, with a trio of banks testing the waters ahead of the first-ever Turkish investment-grade corporate bond, spurred on by expectations that the government’s rating may be upgraded to investment grade before the end of the year.
Turkish issuance in the international bond markets is at its highest level so far this year at $10 billion for 2012, more than three times the $3.3 billion issued in 2011, according to data provider Dealogic. Turkey makes up 8% of all debt issued from the countries in Central and Eastern Europe, the Middle East and Africa, and total international bond issuance from companies in this region is at a record $126.8 billion so far in 2012, a rise of 53% from last year.
In part, Turkey is riding on this broader wave of positive sentiment towards the region’s emerging markets as a whole.
“The volumes of debt issuance by emerging markets is on course to break all records this year,” said Stefan Weiler, head of debt capital markets for Central & Eastern Europe and Africa at JP Morgan Chase and Co.
“For the first time in Europe, there is more bond than loan issuance. Bonds have increased in popularity – issuers can get a longer tenor while diversifying their funding sources at the same time,” Mr. Weiler said.
But Turkey is set to break new ground, with a flurry of new bank bonds this week acting as a litmus test for what’s set to be the country’s first ever investment-grade corporate bond.
Investment-grade-rated Turkish lender Akbank T.A.S. Wednesday sold $1 billion of debt, in a deal that saw the order book reach more than $9 billion.
Turkiye Is Bankasi AS, the country’s largest bank by assets, launched a dollar benchmark 10-year bond this week. Turkiye Is Bankasi is rated just one notch above junk status, but it still managed to use higher yields to lure investors into so-called Tier-2 debt, which leaves investors taking the pain of any default ahead of other types of bondholders.
The trio of bank bond issuers is rounded off by Turkiye Vakiflar Bankasi, which is also looking to sell subordinated debt. This deal will be the real test of investor appetite — the bank is rated Ba2 by Moody's Investors Service and BB by Standard and Poor’s Corp. — a couple of notches below investment grade. Vakiflar Bankasi’s investor meetings start Oct. 18.
These banks are in the bond market ahead of the first investment-grade Turkish corporate issuer in the international markets. Brewer Anadolu Efes Biracilik Ve Malt Sanayii AS is preparing to launch its inaugural bond next week–the company is holding investor meetings in Europe and the U.S this week.
Talk of a possible upgrade by the end of the year to Turkey’s sovereign rating to investment grade by credit rating companies is driving investors’ appetite for Turkish corporate bonds, analysts say.
Turkey is one notch below investment grade, with Standard and Poor’s rating it at BB, Moody’s at Ba1 and Fitch at BB+. But this month, Fitch said it would review its rating before the end of the year, having said in August it might upgrade Turkey to BBB minus — its lowest investment-grade rating — if inflation moves closer to the central bank’s target and the current account deficit narrows to a more sustainable level.
Turkey’s current account deficit shrank to its narrowest point in almost three years in August, showing investors that economic growth isn’t just based on runaway spending. The current account deficit, which measures Turkey’s short-term external financing needs, declined to $1.18 billion in August from $4.03 billion a year earlier, reducing the 12-month figure to $59 billion, or about 7.5% of gross domestic product, the central bank said earlier this month.
The ballooning deficit had triggered a run on the lira last year, and forcing the central bank to more than double interest rates to as high as 12%. And Fitch and S&P both said they were concerned the size of the deficit left the economy vulnerable to sudden withdrawals of foreign investment, which could reduce lending and business activity.
“The wind is blowing behind Turkey and there is good momentum, investors will get a better yield and a safe place to park their money for the short to medium term,” said Hakan Aksoy, an emerging markets debt portfolio manager at Pioneer Investments.
Mr. Aksoy said there is always the chance that Turkey may not be upgraded, but he is ‘cautiously optimistic.’
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